Small investors get fingers burnt in Europe: The Continent was disappointing. Now Caroline Merrell and Nic Cicutti find hopes pinned on Japan

EUROPEAN privatisations were the last investment fashion, but the hoards of investors who piled in have been bitterly disappointed.

Now Japan and Latin America are being lined up for the next push to small investors.

Kleinwort Benson's pounds 500m European privatisation trust has dropped by 12 per cent since the fund was launched two months ago.

As many as 85,000 shareholders invested in the trust which buys shares in privatised companies in EC countries.

Since the fund was launched, 300 million of the 800 million shares have been bought or sold. Arthur Copple, analyst with Smith New Court, the fund's sponsoring broker, said he believed that some of the trades had been driven by private investors 'stagging' - buying shares to sell them off instantly to try to make a quick profit.

Many investors stagged UK privatisation shares and were able to make a quick profit over a short time.

Anyone who bought shares in the European privatisation funds in the expectation of quick profits will be looking at a considerable loss. Many investors appear to have gone ahead and sold, anyway.

Shares in Mercury's pounds 575m European Privatisation investment trust have dropped 9.2 per cent since the fund started trading less than a month ago. About 50,000 shareholders invested in the fund.

Lough Callahan, director of Mercury Asset Management, said that 11 million shares had traded in the first day.

'At the end of January we were still in a bull market, since then markets have been choppy,' he said. He thought that some of the selling had been because of stagging by private investors.

Fidelity is launching a global privatisation trust, and Johnson Fry a European Utilities Trust, a high income investment trust focusing on utilities companies. Starting yield is expected to be 6 per cent gross.

At least two launches in Japan- linked investment and unit trusts are planned over the next few weeks.

Despite this week's resignation of Morihiro Hosokawa, the Japanese Prime Minister, in yet another financial scandal, fund managers still predict a turnaround in the Japanese economy.

They are backed by SG Warburg Securities, whose latest survey of Japan suggests a revival in its fortunes is nigh after years of recession.

'We believe dawn is finally approaching and while the economy may bump along a 'corrugated bottom', the outlook is brighter from 1994-onwards,' claims the survey.

The Nikkei 225 stock market index, which hit a low point of 14,300 in August 1992, now stands above 19,000. SG Warburg believes it could rise 20 per cent over the next 12 months.

Hypo Foreigh & Colonial aims to launch its Japanese Growth Fund, a unit trust investing in small and medium-sized companies, mainly in retailing, housing and telecommunications, in the next few weeks.

Jamie Ware, the company's sales director, said: 'The Japanese government has proposed tax cuts for this year, increasing consumer spending power and boosting retail sales and profits.

'With interest rates low in Japan, we are expecting savers to transfer their savings to the stock market and push up share prices.'

Schroder is also preparing to launch a Japanese investment trust, similar to its Tokyo Fund unit trust. The Tokyo Fund is the best- performing fund in its sector since its launch in 1981.

Two investment trusts are in the process of being launched to take advantage of the boost to Latin America being given by the North American free trade agreement that came into force at the beginning of this year.

The lifting of trade barriers will create a market of 370 million consumers. Economic growth in the region is expected to be about 5 per cent, compared to 3 per cent in Europe and 7 per cent in the Pacific Rim.

Singer & Friedlander, the fund manager, is launching the Aztec fund, invested mainly in Mexico and Argentina.

Templeton is also offering a Latin American fund. Ken Nicholson, marketing manager, said: 'Latin America had held up better than other emerging markets during the stock market turmoil.'